Source Lunch with … Fred Cummings
Fred Cummings founded Elizabeth Park Capital Management in Pepper Pike in 2008. Over the years of running a supremely successful, bank-focused hedge fund — which happens to feature some of the region’s most prominent businesspeople as investors — he has carved out a significant niche in the investment world and banking industry, comfortably establishing himself as an authority the world of M&A for financial institutions.
With 2017 shaping up to be another highly active year for bank deals, Crain’s decided to sit down with Cummings to talk about the M&A environment overall, what trends are driving buyers and sellers in today’s market, and what catalysts in the banking sector could influence deal flow from here.
So 2016 was a big year for bank M&A. What’s activity looking like in 2017 so far?
While M&A is not stronger than ever, it’s stronger than it’s been in the last six years. Things are moving in the right direction in terms of the number of deals getting done. And even the price-to-tangible book multiples are all trending higher. I think the all-time high level of M&A activity occurred in the early 1990s, where you had a record number of deals. One reason we won’t see that happen again is simply because there is a fewer number of banks out there. So one has to look at the percentage of banks that have sold each year relative to the number of banks at the beginning of the year. That number has been hovering around 4%. Around the early ’90s, it reached 4.5%. So that’s a signal that things are very robust and very healthy right now.
What’s comparable in terms of M&A volume today is relative to some 25 years ago, then. Why did it take so long to get back to this level of activity?
There are a couple factors. For one, typically buyers don’t want to buy until they’re confident credit quality is sound, and we’re clearly at that point. Right now, credit quality indicators are stronger than they were (before the) financial crisis in 2007. Two, you had bank stock prices go up. That’s allowed the buyer to have strong currency with which to pursue acquisitions. Three, the regulatory environment has loosened up to some extent. Not to the extent we need it to, but it’s improved. And lastly, the economy is improving. All those factors taken together have contributed to an ideal environment for M&A activity to occur.
So as we talk about it being a strong year for M&A, how’s that treating your business?
We launched an event-driven fund in February 2016 with the focus of identifying banks who would be likely sellers over a three-year time frame in anticipation of M&A remaining strong. That fund did well last year, in part due to the broad-based rally that bank stocks enjoyed. But in terms of number of deals in that fund, we had five banks sold in that fund last year. This year, we’ve had seven so far. So we’re very pleased with that progress.
And I imagine you expect more before the end of the year?
We fully expect, based on our conversations with banks across the country, that there is going to be more M&A. Banks are looking to increase their market share in specific markets all over the country and looking to achieve economies of scale, cut costs, and they’re attempting to leverage their capital. And that’s the best thing. The banking industry is blessed with a lot of capital right now. And they want to put that to work, and one way to do that is through strategic M&A.
Now let’s say the administration actually makes progress on its agenda and achieves things like bank regulatory relief or tax reform. How could that impact the M&A landscape?
I think the biggest impact would be regulatory changes, particularly loosening regulations on larger banks. At that point, you’d likely have more big banks like KeyBank and Fifth Third Bank entering the M&A markets. We saw Huntington Bank do a deal over the last year and Key. But I think the biggest change would be with any type of regulatory relief, you’ll see more big banks, super-regional banks, actually pursue deals. That would put more buyers in the marketplace.
And those large banks would target other large banks, too, I imagine.
Yes, they’d buy larger banks. The banks with assets of $20 billion to $50 billion would be the sellers. Right now, most of those banks want to be buyers. If we get regulatory relief, some of those big, super-regionals might enter the M&A arena.
In terms of relief, how the definition of SIFI (systematically important financial institutions) banks could change, would be a major factor in this, right?
It’s why we think the largest banks would be the biggest beneficiaries of any type of regulatory relief. What you’re looking for in tangible regulatory relief is definitely that SIFI definition, which is defined as a bank with assets greater than $50 billion. That threshold might be lifted. And if that happens, we anticipate some of those banks becoming buyers.
Any thoughts on the general state of M&A in our regional market here or across the state?
We know there are a lot of banks around and outside the state who are interested in becoming bigger here in Northeast Ohio — names like First Commonwealth Bank, S&T Bank, Park National Bank in Newark, Peoples Bank in Marietta. There are a number of banks who want a stronger presence in Northeast Ohio or want to enter the market based on the number of business that operate here. So I would expect there to be some M&A still. But you got to have a willing seller, and we don’t know how many are really willing to sell.
A top item on your bucket list?
Visiting the Ferrari factory in Maranello, Italy
Traveling and drinking red wine
Any wines you prefer?
“Cabernet Sauvignon. Joseph Phelps is one of my favorites.”
What’s something your friends may not know about you?
“I’m a big fan of Broadway shows.”
If not running your own investment business, what might you be doing?
“Probably teaching elementary school math. I love young people and working with kids.”
34205 Chagrin Blvd., Moreland Hills
Sausage sandwich with peppers and onions, with chips and iced tea. And the catch of the day: lemon vinaigrette salmon served on a bed of chick peas, cucumbers and tomatoes, with water.
The restaurant has an industrial-modern feel. Bright, spacious and colorful. Lots of authentic Italian dishes and reworked classics. Quick service for a busy lunch.
$37.26, plus tip
Published at Sun, 27 Aug 2017 04:01:00 +0000